Tips to Payoff Your Mortgage Early
Thinking of getting ahead on your mortgage balance? Paying off your mortgage early might be simpler than you think! Here are some helpful tips to help you shave years off your mortgage.
Get Creative In Extra Payments
When you make extra payments on your mortgage, it is applied to your principal balance. As an example, on a $220,000, 30-year mortgage at a 4% interest rate, here are some long-term effects of extra payments:
- If you make one extra payment each quarter you’ll save $65,000 in interest and pay off your loan 11 years early.
- If you divide your payment by 12 and add that amount to each monthly payment, you’ll make one extra payment each year, saving you $24,000 and shaving four years off your mortgage.
Before you make additional payments, call your mortgage servicer and find out what you need to do so that your extra payments will be correctly applied to your loan. Inform them that you want to pay more aggressively and ask the best way to do so. Then, check next month’s statement to make sure it's been properly applied.
Get a bonus or tax refund? You can funnel some or all of it toward your mortgage.
Apply some of your raise or bonus money toward your balance. Let's say you got a 30-year, fixed-rate mortgage for $200,000 at 4.5 percent. Then, five years later, you can make an extra $10,000 lump-sum payment. Doing so pays off the mortgage two years and four months earlier, and saves more than $19,000 in interest.
Refinancing Into A 15-year
Let's say you got a 30-year, fixed-rate mortgage for $200,000 at 4.5 percent. Then, five years later, you can refinance into a 15-year loan at 4 percent. Doing so pays off the mortgage 10 years earlier and saves more than $60,000 (if you exclude closing costs on the refi).
Those shorter-term mortgages often carry interest rates a quarter of a percentage point to three-quarters of a percentage point lower than their 30-year counterparts.
Refinancing isn't quick or free. It requires filling out the application, providing documentation, and having an appraiser visit. There are closing costs.
Unless the new interest rate is lower than the old rate, there's no point in refinancing.
Downsize
This is a drastic step but could yield drastic results. If you’re set on paying off your mortgage and your home is larger than you need, consider selling and using the profits to buy a smaller home. After doing so, you may be able to pay all cash for your next, new home.
MLD Mortgage Inc. dba The Money Store